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Stand by for possible NZ-style inflation surprise

Mark Mulligan

Health insurance could be one factor driving inflation in the second quarter. Photo: Nic Walker

The Australian Bureau of Statistics will publish its quarterly inflation update on Wednesday, with economists almost evenly divided on whether the data will come in slightly above or below the Reserve Bank of Australia’s own expectations.

Most see the quarter-on-quarter headline figure in the Consumer Price Index (CPI) at between 0.5 and 0.6 per cent, equating to an annual rate of just below or above 3 per cent.

This range is partly based on implied forecasts by the Reserve Bank of Australia, whose monetary policy has been built on inflation targeting since the 1990s.

However, the RBA is more concerned about the underlying inflation rate, which accounts for seasonal factors and other variations from quarter to quarter.

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The central bank expects this to come at around 2.7 per cent year-on-year, comfortably inside its target band of between 2 and 3 per cent.

Analysts say that although the annual pace of headline CPI may have lifted above the top of the RBA’s target band in the second quarter, underlying trends point to moderation in the second half of this year and into 2015.

This is due to “subdued domestic demand, upward pressure on the unemployment rate and continued weak wages growth”, Macquarie Wealth Management said in a note on Tuesday.

It says regulated increases in items such as health insurance, tobacco excise and postage stamps would be the main drivers of the second-quarter spike, offsetting quarterly declines in the price of petrol, holiday travel and pharmaceuticals.

Currency markets have already priced in the chance of an interest rate cut by the RBA, and only a much lower-than-expected CPI figure would put heavy downward pressure on the dollar.

This happened last week in New Zealand, when surprisingly low in¬flation data drove the Kiwi down about US1.5¢.

A New Zealand-style surprise has not been discounted.

“A downside surprise on Wednesday would be a pleasant outcome and endorse the RBA’s current view that inflation will be contained in the medium term,” National Australia Bank said in a note on Monday.

“But in itself it would not be a trigger for the RBA to cut [interest rates] again. As we see it, a benign inflation outlook is a necessary but not sufficient condition for the RBA to cut again.”